You may be familiar with the Regional Green
House Gas Initiative (RGGI). RGGI is a "cap
and trade" program. The New England states
will impose emissions limits (a cap) on
businesses and allocate a finite number of
certificates to each business in proportion
to their green house gas production.
If a company produces less green house gas
then their limits allow (based on the number
of certificates they receive) then they can
sell their remaining certificates to those
who need them.
Imagine that GE in Lynn, Massachusetts
receives RECs that allow them to produce 100
units of CO2 per year. However, because of
factory improvements, they reduce their
emissions to 50 units of CO2. That means they
have 50 RECs available to sell.
Meanwhile, imagine that Gillette, in South
Boston, also has 100 RECs but they produce
150 units of CO2 per year. Since Gillette
produces more CO2 than allowed, they must
purchase 50 additional credits to cover their
overproduction of CO2 or they must figure out
how to lower their CO2 production.
Gillette may decide that it will take longer
than one year to reduce emissions from their
plant or that purchasing RECs is a better
investment than modifying their production
process so they purchase enough RECs to cover
their excess CO2 production. Since GE has 50
credits to sell and Gillette needs 50, they
could agree on a price and exchange RECs for
money or both can buy or sell credits in the
REC market.
Over time, the RGGI states will lower the
number of certificates available and will
institute monitoring and fines for exceeding
certificate limits, this will have effect
reducing the amount of CO2 released by
businesses.
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